Expert warns on cost cutting

PUBLISHED : Wednesday, 20 October, 1993, 12:00am
UPDATED : Wednesday, 20 October, 1993, 12:00am

CHINA will have to pay a higher price for more drastic retrenchment if the austerity programme fails because of resistance from regions and enterprises, a leading economist has warned.

Zhang Zhuoyuan, head of an economic institute under the Chinese Academy of Social Sciences, said half-baked austerity measures would not help curb inflation and rising commodity prices.

The economist hinted that opposition from regions and enterprises would hamper a full implementation of the austerity programme.

He said investment and demand would surge and the economy would heat up again before ''a soft landing'' if regions and enterprises halted the austerity measures prematurely.

Mr Zhang said the retail price index this year would go up by 20 per cent and the value of the yuan against the US currency would drop again if excessive growth in investment and currency was not stopped.

He said price increases would continue if the total capital investment exceeded 1,000 billion yuan (about HK$1,340 billion), industrial output grew more than 25 per cent and gross domestic product rose by 13 per cent.

''Should that [the growth index] occur, the central Government will have no choice but to make greater economic adjustments next year to restabilise the national economy. It will have to pay a higher price,'' Mr Zhang said.

The economist, however, maintained that retail price growth could be kept within 14 per cent in the second half of this year if the runaway growth in sectors such as currency and fixed investment could be curbed.

''If we are able to curb the excessive growth, we will only have to make minor economic adjustments in 1994.

''The Chinese economy will be further stabilised and price rises will be kept below double-digit levels,'' Mr Zhang said.

He told a symposium in Beihai on Monday that the overheated economy would gradually cool and the macro-economy would return to normal after the programme.

Mr Zhang indicated, however, that it would take another six months for the inflation rate and price levels to go down substantially.

Despite the hidden danger of runaway inflation, the economist said the Chinese Government was determined to gradually remove price controls, adding that price reforms had progressed well and achieved remarkable results.

He said the highly centralised government fixed price system had been replaced by a market-oriented price structure.

He noted that a new regulatory mechanism on price adjustment in a market economy had also been gradually formed through the successful introduction of pilot schemes.

Drastic price decontrol measures launched by the former Communist Party head Zhao Ziyang in 1988 led to economic chaos and, subsequently, his downfall.